Chinese investors eye return to crypto with Hong Kong poised to approve Bitcoin ETFs

Mainland chinese investors appear to be one big step closer to betting on digital assets again. And they have Hong Kong to thank for it.

Hong Kong regulators are preparing to approve the rollout of spot price Bitcoin ETFs as soon as April 15, according to a Reuters report on Wednesday, which cited two people familiar with the matter.

The development would provide mainland Chinese investors, who are barred from speculating on virtual assets, a way to access the marketplace, say local investment experts.

It would also open the valve on a fresh inflow of liquidity for a market in the early stages of a bull run.

“There is a huge appetite for Chinese investors as Bitcoin is seen as a good alternative asset to hold,” Sean Lee, a senior advisor at the Crypto Council for Innovation, told DL News. “But they can’t get access through normal means to the asset. Now there is a compliant way to do so.”

Applications in the works

The potential approval comes even as the Hong Kong’s Securities and Futures Commission wages a public campaign to educate investors on the perils of crypto fraud.

The SFC has directed crypto exchanges to get licensed or face enforcement action, and has worked with police to try and prevent fraudsters from preying on unwitting investors.

At the same time, officials have been keen to burnish Hong Kong reputation as a vibrant marketplace for web3 development. In December, the SFC opened an application process for issuers of spot price Bitcoin ETFs and investors hoped some would get approved in the first half of this year.

Ethereum ETF?

Crypto supporters seized on the news of the ETFs.

Johnny Ng, a Hong Kong legislator, said the products would bolster the city’s credibility with crypto investors. And he wasted no time in calling for the SFC to take further steps.

“I urge regulatory authorities to expedite the approval of an Ethereum spot ETF,” Ng tweeted.

When DL News asked the SFC about the possibility of approval for the products next week, an agency spokesperson declined to comment. Previous rumours about a launch in February also proved incorrect.

Hong Kong’s reputation as a global financial centre has taken a hit in recent years due to strict Covid policies, political tension over Hong Kong’s relationship with Beijing, and a sluggish Chinese economy.

To that end, it has brought in a new licensing regime for virtual asset service providers, and is also working on regulations for over the counter trading and stablecoins. The city approved cryptocurrency futures ETFs in 2022.

Wilder aspects

It is also attempting to reign in some of the wilder aspects of the crypto industry, including an explosion in suspicious platforms and investment scams.

Among them, crypto exchange JPEX, which is currently under investigation by authorities, has left users over $200 million out of pocket.

Lee at the Crypto Council for Innovation said while the launch may not be significant in terms of volume it would be a positive sign for the industry.

“It’ll definitely help boost the city’s image,” he said.

Given the opaque nature of the application process, the exact number of applicants isn’t publicly known. Around a dozen entities are thought to be interested in launching an ETF product.

Several applicants for the spot Bitcoin ETF are understood to be the Hong Kong arms of mainland Chinese firms, including notable names such as Harvest Global and China Asset Management.

In 2021, China prohibited speculative trading in Bitcoin and its ilk.

A spot Bitcoin ETF in Hong Kong could provide mainland investors with an approved pathway to invest in cryptocurrencies without direct possession, albeit within the bounds of mainland capital controls.

And cryptocurrencies remain popular in mainland China despite their prohibition.

Underground markets

Buyers often have to resort to using overseas bank accounts, underground markets, and over the counter storefronts to purchase crypto.

Among some of the crazier methods, some mainland residents have even bought “digital residency” from countries like Palau that allows them to use a local ID card to open up accounts on exchanges. Such IDs were on sale at Token 2049 in Singapore last year for a couple of hundred dollars.

Lee added that local regulation in Hong Kong also allows for Bitcoin holders to swap the asset into a compliant financial product.

The response in Asia to the US’s spot Bitcoin ETF introduction was mixed, with several jurisdictions issuing warnings or outright bans.

But its regulators have been cautious when it comes to spot Bitcoin ETFs. The response in Asia to the US’s spot Bitcoin ETF introduction was mixed, with several jurisdictions issuing warnings or outright bans.

In an interview with DL News in January, Jason Titman, the COO of Swyftx, an Australian crypto exchange, called the bans of US-approved ETFs “unprecedented.”

Shortly after its rollout, the Monetary Authority of Singapore barred investment firms from offering US Bitcoin ETFs to retail investors, citing the need for extreme caution.

Others have been more indecisive.

Taiwanese regulators initially said indices tracked by ETFs must comprise “securities,” which doesn’t include Bitcoin under its current regulations.

However, it hasn’t ruled out the possibility of a domestic spot Bitcoin ETF. Its Chamber of Commerce plans to release a study on the ETFs this month.

Private funds

Thailand’s Securities and Exchange Commission said in January it had “no plan to allow spot bitcoin ETFs in Thailand” for the time being.

However, in March the SEC said it would allow money managers to launch private funds for US spot Bitcoin ETFs for institutional investors and the super-rich.

In South Korea, the Financial Services Commission warned brokerages on January 12 that offering the US ETF could be illegal and “violate the existing government stance on virtual assets and the Capital Markets Act.”

But in the run up to parliamentary elections, which concluded on Thursday, both parties suggested they were open to allowing the ETFs. The People Power Party, which lost the vote, later walked back those comments.

The incoming Democratic Party indicated earlier this month it would remove restrictions on crypto ETFs.

Callan Quinn is DL News’ Hong Kong-based Asia Correspondent. Get in touch at callan@dlnews.com.